LPG sector needs better price regulation - competition watchdog

Cape Town – The regulated price of liquefied petroleum gas (LPG) is not monitored properly, leading to market abuse by big players and making it difficult for smaller businesses to enter the sector. 

The Competition Commission on Tuesday briefed the portfolio committee on economic development about its findings and recommendations following an inquiry into the LPG sector. 

READ: Petrol body gets more time off from Competition Act 

LPG is used as thermal fuel for industrial, commercial and residential use. It is used especially by households that do not have access to electricity, and the affordability and availability of LPG to poorer households is therefore a concern. 

Competition Commissioner Tembinkosi Bonakele told MPs there are a number of regulatory shortcomings in the LPG sector, such as the Department of Energy not adequately enforcing the maximum refinery gate price and the maximum retail price. 

(The maximum refinery gate price stipulates that any company buying LPG from a local refinery can be charged only up to a maximum tariff.)

Bonakele pointed out that the Department of Energy currently has only nine inspectors across South Africa who are responsible for monitoring all petroleum products, including LPG.

READ: SA regulator raids five gas suppliers 

These nine inspectors are responsible for monitoring over 5 100 fuel retail service stations countrywide, and it could take over two years for another inspection to take place at the same service station.

“This lack of monitoring leads to pricing abuse by market participants,” Bonakele said. 

The ‘big’ players

Bonakele said the Competition Commission found significant concentration in the LPG sector, as only five refineries are currently producing LPG, among them Sasol and PetroSA. 

“One of the findings in the market inquiry,” Bonakele said, “is that our refineries aren’t producing enough LPG and South Africa therefore has to rely on imports to fill the gaps in supply.”

In addition, four large wholesalers – Afrox, Easigas, Totalgaz and Oryx – account for more than 90% of the wholesale market. 

READ: SA gas suppliers can't keep up 

The competition commissioner pointed out that the historic relationship between refineries and wholesalers perpetuates the concentration. 

“Refineries used to sell LPG themselves and there are current wholesalers divisions within the refineries. This creates an unregulated ‘layer’, as the wholesalers get exclusive supply arrangements from refineries, including discounts.

"This means it is difficult for smaller businesses that want to enter the market and buy LPG.”

There are also long-term supply agreements, whereby wholesalers can buy as much LPG as they need and only the residue is made available to the rest of the market.

“Everybody else must then buy LPG at spot price and the existing long-term supply agreements therefore benefit the incumbents,” Bonakele said. 

READ: Afrox secures R1.1bn LPG contracts 

He added that a number of new entrants trying to “break into” the commercial market, especially black-owned firms that sell gas in townships, are forced to exit the market as a result of these existing supply arrangements.

“You can’t grow if you can’t get supplies, and then the smaller entrants collapse their businesses into existing wholesalers.” 

In the market inquiry report, the Competition Commission pointed out that recent mergers between Easigas and Reatile and Totalgaz and KayaGas have increased in the supply of LPG to bulk markets.

What the commission recommends

The Competition Commission recommended that the National Energy Regulator of SA (Nersa) take over the role of monitoring the industry and regulating the pricing of LPG. 

Michael Cardo, Democratic Alliance spokesperson on economic development, asked Bonakele during question time if Nersa currently has the capacity to oversee the LPG industry in addition to its other many functions. 

He admitted that capacity at Nersa will need to improve for the entity to take on the extra monitoring role. New legislation is called for that will empower Nersa – sponsored by the Department of Energy, which needs to be a partner. 

ANC MP Sipho Mbatha was specifically concerned about the hindrances faced by smaller black entrants, and asked Bonakele how the Competition Commission intends to break down the monopoly in the LPG market. 

READ: Radical changes to competition law underway

"We don’t know how to break the monopoly and there's no legal mechanism to dismantle structures," the competition commissioner responded. He said current competition laws allow only for dealing with the behaviour of firms, such as collusion and anti-competitiveness, and not monopolies.

He also pointed out that proposed amendments to the Competition Act may in future enable competition authorities to act against overconcentration in specific markets.

Economic Development Minister Ebrahim Patel announced during his budget speech recently that the Competition Act will undergo far-reaching changes to address the barriers to entry for smaller players, and the skewed ownership structure in the economy.